Interest rate cuts face speed bumps

THERE are early signs the rate cutting cycle in South Africa may come to a premature end. Brian Kantor, the investment strategist at Investec Private Securities, said on Monday that the Johannesburg Interbank Agreed Rate (Jibar) – the rate at which banks lend to each other – was signalling there would be no further rate cuts in the next six months.

This comes after a one percentage point cut in the South African Reserve Bank’s repo rate last week – and when economists are predicting several further cuts, possibly to as low as six per cent.But the evidence is ambiguous. Kantor said rates in the money market were sending conflicting signals: ‘Forward rate agreements (FRAs) are pricing in a one percentage point cut within three months.’FRAs are three-month contracts between banks that begin at some point in the future.Kantor said it was unusual for the rates to send different signals and attributed the difference to confusion about the inflation outlook.He said: ‘The problem is the very unusual difference in the direction of consumer and producer prices. The consumer price index continues to rise at an uncomfortable rate.’But prices at the factory and farm gates are in something like free fall, directly affected as they are by the strong rand and the global deflation.’The bank started its rate cutting cycle in December, after hiking its repo rate by five percentage points between June 2006 and June last year.Economists expect the bank will make further cuts to reflate the economy, which has almost certainly been in recession – two consecutive quarters of contraction. The economy contracted 1,8 per cent in the fourth quarter of last year and data due at the end of the month will probably show a further contraction in the first quarter.Despite the signals from Jibar, Kantor predicted that the repo rate would fall further ‘because the economy will need all the help it can get. Or, in other words, Jibar is getting the interest outlook wrong.’Ian Cruickshanks, the head of strategic research at Nedbank Capital, said that FRAs ‘imply a rate which is 130 points lower by August, which would probably point to a repo rate of seven per cent or 7,5 percent. But the market is not presently discounting any further move thereafter.’The managing director of Econometrix Treasury Management, George Glynos, said: ‘Markets are pricing in a strong possibility of one percentage point decrease at the monetary policy meeting at the end of the month, or the possibility of a 50 basis point cut at each of the next three meetings. Either way, the market still mostly believes there will be a further 150 basis points’ worth of rate cuts, with no further cuts anticipated thereafter.’He said the bank had already cut very aggressively and ‘typically the impact will only start to come through six months after each rate cut’.In other words, the effect of the first cut would only be reflected in next month’s data at the earliest.Colen Garrow, an economist at Brait, expected more in the way of cuts. He said the data on gross domestic product due this month would show a contraction in the first quarter and the Reserve Bank would feel obliged to cut the repo rate by a full percentage point. He said that by the end of the year the repo rate would be 6,5 per cent and he expected a further cut to six per cent early next year.-Business Report